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By Tom Graham
When I started my first business, an acquaintance (who is now a very good friend) went to lunch with me. He was a highly respected venture capitalist and had read my business plan and liked my idea. I was sure he was going to fund the entire deal on the spot. Instead, he provided the road map to getting my venture funded. He told me that my best shot at raising money was through local Angel investors. He quickly lined me up with a local Angel investment group in which he was a member and got me on their calendar. Well aware of the wonderful opportunity, I started to prepare my pitch.
Although I was well prepared, nothing could have prepared me for that breakfast meeting. There must have been 50 people in that room and I only had 10 minutes to make my pitch. To top it off, I was the third of three entrepreneurs selected to present that morning. I had not even got through my presentation when the questions started flying. I had heard most of them before but they seem intensified in this large setting and before I knew it, two guys in the audience were bantering with each other about whether my business was or wasn’t ideally suited for the Internet.
There is no doubt I lost control of the presentation, but I walked out of the room with 6 new investors. With their money (and help), we went on to launch, successfully run and ultimately sell the business. This experience is seared into my brain and serves as the basis for my five tips:
1. An Early Angel Is The Best Angel. If I didn’t have the advice and support of my friend, the venture capitalist, I don’t think I would have ever been able to secure the funding and launch the business. At our lunch, he basically walked me through the entire funding process and he helped (and encouraged) me every step of the way.
He then set up the meeting with the local Angel investment group, spoke on my behalf during the “members only” part of the meeting and reported back to me the comments made behind closed doors. It was like being a fly on the wall. He was my first investor and because of his reputation, I know he drew in others.
So, what if you don’t have an acquaintance in the Venture Capital community? Start asking around. Eventually you will find a friend of a friend who will go out to lunch and hear your pitch.
2. Angels Travel In Packs. As I began to close out my round of funding, I noticed that rather than 6 degrees of separation, Angels investors had 2 degrees of separation, at most. As the funding began to firm up, the fact that they all knew (or knew of) each other, played a key role in closing the deal. They talked to each other, shared information and in some ways made a group decision. I’ll never know if one of these Angels had pulled out of the deal, what the others would have done, but my strong hunch is that the deal would have quickly unraveled.
3. Angels Are Idiosyncratic. Even though they like to travel as a group, when you’re dealing with Angels, you are dealing with individuals and their whims. It is your job to manage and master those whims. In that breakfast meeting, the individual arguing against my business model was never going to invest, but his sparring partner did and became one of my biggest champions. I later found out that the individual arguing against my plan never met an Internet business he didn’t hate.
Each Angel I met along the way had valid concerns and questions, but each had at least one whim. Some were benign but some became major topics of discussion in meetings. The danger came in larger groups when a whim became elevated to a discussion point. Whenever possible, I would try and deflect the capricious questions and answer the more meaningful and valid questions. But, it wasn’t always easy.
4. Know What You Want. One of the things you need to do early on in the process is to create a term sheet and valuation. Even though the valuation and terms will change before the deal is done, come up with what you think is a fair deal. This exercise will help you to better understand what you are looking for and what your company will look like after the funding.
Many things will change including your equity position, corporate structure and capitalization.
This is a good time to get a lawyer involved. Because the deal will be shifting and you want to keep legal bills down, ask your lawyer to keep the hours down by asking for a boilerplate term sheet. There is no need to get fancy with the term sheet as one or more Angels will want to significantly change it. This is especially true if one of the Angels is a lawyer.
5. Create Excitement Around The Investment. After a handful of Angels have expressed a degree of interest, you, the entrepreneur, should move that interest into action and investment. The best way to do this is to generate a buzz around the investment opportunity. Setting a realistic deadline for the close is a good way to do this as it forces investors in or out.
This also creates a buzz as investors begin to see that the supply of available equity is quickly being snapped up. As you begin to close out the funding, keep investors informed about the timing of the close. Investors need time to review the documents and pull the money together. The move the investors know about what is going on, the more comfortable they will be with the investment.
When I started my first business, an acquaintance (who is now a very good friend) went to lunch with me. He was a highly respected venture capitalist and had read my business plan and liked my idea. I was sure he was going to fund the entire deal on the spot. Instead, he provided the road map to getting my venture funded. He told me that my best shot at raising money was through local Angel investors. He quickly lined me up with a local Angel investment group in which he was a member and got me on their calendar. Well aware of the wonderful opportunity, I started to prepare my pitch.
Although I was well prepared, nothing could have prepared me for that breakfast meeting. There must have been 50 people in that room and I only had 10 minutes to make my pitch. To top it off, I was the third of three entrepreneurs selected to present that morning. I had not even got through my presentation when the questions started flying. I had heard most of them before but they seem intensified in this large setting and before I knew it, two guys in the audience were bantering with each other about whether my business was or wasn’t ideally suited for the Internet.
There is no doubt I lost control of the presentation, but I walked out of the room with 6 new investors. With their money (and help), we went on to launch, successfully run and ultimately sell the business. This experience is seared into my brain and serves as the basis for my five tips:
1. An Early Angel Is The Best Angel. If I didn’t have the advice and support of my friend, the venture capitalist, I don’t think I would have ever been able to secure the funding and launch the business. At our lunch, he basically walked me through the entire funding process and he helped (and encouraged) me every step of the way.
He then set up the meeting with the local Angel investment group, spoke on my behalf during the “members only” part of the meeting and reported back to me the comments made behind closed doors. It was like being a fly on the wall. He was my first investor and because of his reputation, I know he drew in others.
So, what if you don’t have an acquaintance in the Venture Capital community? Start asking around. Eventually you will find a friend of a friend who will go out to lunch and hear your pitch.
2. Angels Travel In Packs. As I began to close out my round of funding, I noticed that rather than 6 degrees of separation, Angels investors had 2 degrees of separation, at most. As the funding began to firm up, the fact that they all knew (or knew of) each other, played a key role in closing the deal. They talked to each other, shared information and in some ways made a group decision. I’ll never know if one of these Angels had pulled out of the deal, what the others would have done, but my strong hunch is that the deal would have quickly unraveled.
3. Angels Are Idiosyncratic. Even though they like to travel as a group, when you’re dealing with Angels, you are dealing with individuals and their whims. It is your job to manage and master those whims. In that breakfast meeting, the individual arguing against my business model was never going to invest, but his sparring partner did and became one of my biggest champions. I later found out that the individual arguing against my plan never met an Internet business he didn’t hate.
Each Angel I met along the way had valid concerns and questions, but each had at least one whim. Some were benign but some became major topics of discussion in meetings. The danger came in larger groups when a whim became elevated to a discussion point. Whenever possible, I would try and deflect the capricious questions and answer the more meaningful and valid questions. But, it wasn’t always easy.
4. Know What You Want. One of the things you need to do early on in the process is to create a term sheet and valuation. Even though the valuation and terms will change before the deal is done, come up with what you think is a fair deal. This exercise will help you to better understand what you are looking for and what your company will look like after the funding.
Many things will change including your equity position, corporate structure and capitalization.
This is a good time to get a lawyer involved. Because the deal will be shifting and you want to keep legal bills down, ask your lawyer to keep the hours down by asking for a boilerplate term sheet. There is no need to get fancy with the term sheet as one or more Angels will want to significantly change it. This is especially true if one of the Angels is a lawyer.
5. Create Excitement Around The Investment. After a handful of Angels have expressed a degree of interest, you, the entrepreneur, should move that interest into action and investment. The best way to do this is to generate a buzz around the investment opportunity. Setting a realistic deadline for the close is a good way to do this as it forces investors in or out.
This also creates a buzz as investors begin to see that the supply of available equity is quickly being snapped up. As you begin to close out the funding, keep investors informed about the timing of the close. Investors need time to review the documents and pull the money together. The move the investors know about what is going on, the more comfortable they will be with the investment.
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